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According to companies and statistics, the Czech construction industry is showing a decline. In addition to the slowdown in the economy, the cause of the development in the market is also the poorer availability of loans and the continued cooling of demand. And this is prescribed by the entire segment.
Let’s start at the very start of the construction – i.e. with the material manufacturers. According to the head of the Heluz company, Jan Smola, they are now in the worst situation in modern history. In a situation that is said to be much worse than during the last crisis. Demand has dropped dramatically and there is no need to produce the products.
Therefore, brick manufacturers resorted to shutting down their plants.
The multinational company Wienerberger closed eight out of nine Czech factories for the winter. “We cannot produce at half capacity. We either produce at full capacity, or we have the plant closed,” company boss Kamil Jeřábek explains the shutdown.
Another manufacturer – the Czech Heluz – already shut down two of its plants in October. Now the third plant is also about to be shut down, and the fourth plant remains a question mark – it will depend on the development of market demand.
The situation is all the more serious because the factories are not standing for the first time this year. “This is the second shutdown this year. Practically the entire spring, all operations were closed,” says Jan Smola in an interview for the program Agenda SZ Byznys. This year, shutdowns clearly outweigh production.
Cooling is also given by the price. Last year, the prices of building materials climbed to record highs – brick prices jumped by a quarter in the last year alone. The companies achieved record results, from which they are now recovering from the declines. Last year, Wienerberger increased sales by a fifth to 4.87 billion crowns. Profit before taxation rose to 1.65 billion crowns. On the other hand, the Heluz brick group’s consolidated profit after taxation increased by 50 percent to almost 663 million last year.
The materials are in storage
Now the prices of building materials are falling. But interest in them is not growing. “For me, it is a basic symbol of the state of the economy and the construction industry as such,” adds Petr Vaněrka, CEO of ProDoma.
The situation spills over from the manufacturers to the store. Traders also confirm the drop, and most of all for those materials that are at the very beginning of construction. In addition, they are complicating the situation for manufacturers by the fact that they themselves still have full warehouses and thus significantly reduced orders.
Thus, ProDoma is counting on an 18 percent drop in turnover this year. “We consider that a success,” adds Vaněrka.
While in the first half of 2022, goods were reserved half a year in advance and manufacturers replaced each other depending on who was able to deliver, in the fall of 2023 there was an absolute reversal.
Next year will be worse
“The decline in apartments is about 25 percent, so it can be said that the sale of building materials is falling by a similar number,” says Vaněrka.
According to him, the trend and forecast are more alarming than actual numbers. “There are materials here that have dropped by 60 percent, and these are exactly the materials that find themselves in construction at the initial stage. Every manufacturer will speak a little differently now, and I think it’s just what phase of the chronology of the construction they are in. Actually, it can be said that it will happen to everyone,” adds Vaněrka.
At the same time, he points out that 40 to 60 percent is a huge drop, which will not be easy to start back up.
And we get to the construction companies that buy the materials. They are also troubled by lower demand, this time from construction contractors. And next year, according to experts, will not be better.
“Construction companies’ capacities are currently at 93 percent utilization, but according to our survey, capacity utilization will drop to 85 percent on average in the coming months. Some companies now only have contracts for two to three months, and that can be a problem,” says Petr Ondrášek, director of operations at the analytical company CEEC Research, which regularly conducts surveys among construction companies in the Czech Republic.
Companies undercut each other on price
Directors of some construction companies even admitted during questioning that they so-called dumping some orders, i.e. undercutting the price offered on the market, in order to secure work for the following months.
“Today, almost one third of companies commit such behavior that they violate their internal regulations in their offers, be it price list rates or delivery dates. This can be a risk for these companies and will limit their ability to invest in maintenance and development for the next year,” warns Petr Ondrášek.
According to Robert Špalek, chairman of the Czech Chamber of Authorized Engineers and Technicians active in construction, this year’s decline is mainly due to the drop in housing construction.
“We do not expect a significant recovery of the market next year. This year’s slight decline is likely to be repeated. This trend is mainly due to the decline in housing construction,” he confirmed.
This year alone, the number of housing construction starts has fallen by 14.6 percent year-on-year, and in August it was even by almost a quarter. Since April, the number of building permits has also fallen by an average of 10.4 percent every month.
Apartments in the main role
A number of development companies postponed the construction of their new projects during the time of expensive financing and the uncertain economic situation, which forced a large part of potential buyers to wait for a more favorable time.
The Central Group was the first to announce this move last fall, which postponed more than 700 new apartments. And other developers followed.
“For this reason, fewer apartments have been put up for sale in the last year than in previous years, and if the prices of construction supplies and interest rates do not drop significantly, new construction will continue to be postponed,” says Ondřej Šťastný for the largest residential builder in the Czech Republic , Principal Analyst.
As a result, the housing deficit, which the Czech Republic has been struggling with for many years, could begin to gain momentum. “The number of apartments on offer could decrease by up to several thousand over the next two to three years,” adds Šťastný from Central Group.
In order for construction to take off on a larger scale, according to developers’ estimates, the prices of construction supplies must fall by roughly 10 to 15 percent compared to last year, when the prices of some construction materials rose by tens of percent per month.
“Projects under these conditions do not work economically. As for the income side, i.e. real estate prices, they have rather stagnated in recent months, on the contrary, we do not see any significant reductions in construction costs,” comments Petr Michálek, CEO of Skanska Residential.
According to the owner of the Ekospol company, Evžena Korce, the main culprits of the current situation and the deteriorating availability of own housing are, in addition to expensive materials, the high cost of construction work. “The prices of construction works in October increased by another 3.6 percent year-on-year. Although we no longer see dizzying double-digit growth, the continued increase in prices does not bode well,” says the entrepreneur.
It is built less and more expensive
The data shows a simple trend. While the number of building permits issued is decreasing, the total value of permitted buildings has increased significantly – meaning less is being built, but for much more money.
“In the case of apartment buildings, millions of crowns are involved, large infrastructural constructions go up in price by hundreds of millions,” adds Korec.
In addition, the situation in the field of residential real estate has changed the composition of their customers for builders in recent months. “In a higher percentage than before, clients are able to pay for their house without a mortgage. Previously, it was a low percentage of clients. Today, it is a third of our construction,” confirms David Mencl, CEO of Ekonomické stavby.
However, as the head of the company stated, the reason for the change is not only high interest rates. The problem began to accumulate several years earlier, when the Czech National Bank began to tighten the conditions for obtaining a mortgage.
“From limiting the ratio between the mortgage loan and the mortgage value of the property (LTV), shortening the maximum maturity from 40 to 30 years, or introducing DTI (total debt ratio) and DSTI (annual average expenses) limits.” Each of these steps has significantly worsened mortgage availability,” says David Mencl from Ekonomické stavby.
“Today, many expect that everything will be sunny after the high interest rates are over. In fact, the CNB’s deep interventions will continue to suffocate young people’s mortgages,” he adds.
The problem with the drop in demand in all areas of the construction industry is not being solved only by the Czech Republic. Other European countries are also dealing with the decline.
“Among the neighboring countries, the German construction industry shows a worse development, which shows a decrease in value by two percent, or the Hungarian construction industry, which is currently falling by 3.1 percent,” says Petr Ondrášek from the analytical company CEEC Research.
The Slovak construction industry is still stagnant compared to the Czech one this year, despite the fact that in Slovakia there is a drop in the value of the awarding of public contracts to construction companies by a full third. “This will be reflected in the decline in construction production next year,” the expert clarifies.
On the contrary, construction production in Austria (+1.4%) or Poland (+2.1%) shows better results, where the construction industry is turning towards growth. “The Polish government has created a program for young people under 45, offering them a mortgage loan with a two percent interest rate fixed for ten years,” says Petr Ondrášek.
The difference between the bank rate and the subsidized rate is paid by the state, which helps plans to build residential housing.
“In our case, we connect expectations for improvement, especially with the acceleration of permitting processes, with the onset of new building legislation from next year,” concludes the expert.